### Understanding the Money Supply Process: Chain of Events in BankingIn this exercise, we will explore how banks loan out excess reserves and how this affects the overall money supply. **Scenario Description:**- **Initial Transaction:** First Main Street Bank loans all of its new excess reserves to Latasha.- **Subsequent Deposits and Loans:** - Latasha writes a check to Jake, who deposits it in his checking account at Second Republic Bank. - Second Republic Bank loans its new excess reserves to Tim. - Tim writes a check to Rosa, who deposits it in her account at Third Fidelity Bank. - Third Fidelity Bank loans out all its new excess reserves to Alyssa in turn.### Table for Calculating Changes in Banking MetricsYou are required to fill in the table indicating the changes experienced at each bank.| **Bank** | **Increase in Deposits** (Dollars) | **Increase in Required Reserves** (Dollars) | **Increase in Loans** (Dollars) ||---------------------------|-------------------------------------|--------------------------------------------|--------------------------------|| **First Main Street Bank**| | | || **Second Republic Bank** | | | || **Third Fidelity Bank** | | | |- **Instructions:** Enter each answer to the nearest dollar.### Understanding the Process:As this process continues, each loan deposited into a checking account leads to further lending. Assuming no bank retains any excess reserves, the initial $500,000 increase in the money supply creates a larger overall increase in demand deposits.This scenario displays a key concept in banking known as the *money multiplier effect*, illustrating how banks' activities can significantly expand the money supply through repeated cycles of deposits and lending.

The amount that is injected into the economy (money supply) = $500000 Let the reserve requirement ratio = 20%Below is the calculation: The overall increase in demand deposits =$500000×Multiplier= $500000 ×120%=$2500000 Answer. Increase in demand deposits = $2500000

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Now, suppose First Main Street Bank loans out all of its new excess reserves to Latasha, who immediately uses the funds to write a check to Jake. Jake deposits the funds immediately into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Tim, who writes a check to Rosa, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Alyssa in turn. Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar. Increase in Deposits Increase in Required Reserves Increase in Loans (Dollars) (Dollars) (Dollars) First Main Street Bank Second Republic Bank Third Fidelity Bank Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $500,000 injection into the money supply results in an overall increase of in demand deposits.

Now, suppose First Main Street Bank loans out all of its new excess reserves to Latasha, who immediately uses the funds to write a check to Jake. Jake deposits the funds immediately into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Tim, who writes a check to Rosa, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Alyssa in turn. Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar. Increase in Deposits Increase in Required Reserves Increase in Loans (Dollars) (Dollars) (Dollars) First Main Street Bank Second Republic Bank Third Fidelity Bank Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $500,000 injection into the money supply results in an overall increase of in demand deposits.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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